‘Extreme leverage’? Adani’s debt-fuelled expansion under scrutiny

'Extreme leverage'?  Adani's debt-fuelled expansion under scrutiny

A decade ago, Gautam Adani outlined the strategy behind the rapid rise of his business empire: leveraging one company to finance the expansion of another. “Either you sit on the cash pile or you keep growing,” he told the Financial Times. “There is no other way to do it”.

It is a method that has served the Indian businessman well as his Adani Group expanded and diversified into industries from ports to energy. She has become one of the richest people in the world in the process, with a fortune of more than $100 billion as of the beginning of this year.

The pace of lending has only increased as Adani unveils increasingly ambitious initiatives in areas such as 5G and green hydrogen, and the group’s debt has doubled to about $30 billion in the past four years.

But the 60-year-old is under unprecedented scrutiny after the share price plunged in his publicly traded businesses after US short seller Hindenburg Research last week accused the group of years of manipulating prices. stocks and accounting fraud, while criticizing what he said was “extreme leverage.”

Adani Group fiercely denies Hindenburg’s allegations and characterization of its debt, saying it is deleveraging, lowering the group’s debt ratios even as total liabilities rise. On Wednesday, however, the group canceled a $2.4 billion equity fundraiser citing “unprecedented” market volatility.

Analysts and investors say the group’s billions of dollars in planned spending may mean it will have to borrow even more.

“By traditional metrics, they are definitely overleveraged,” said Brian Freitas, founder of Auckland-based Periscope Analytics. “The question is whether their underlying businesses can grow fast enough to pay down the debt.”

People walk past a billboard with the Adani Electricity logo in Mumbai

Adani Group’s business is diverse and covers various industries, including ports and energy © Divyakant Solanki/EPA-EFE/Shutterstock

A sprawling conglomerate with seven listed companies and more unlisted, many of Adani’s most ambitious plans are centered around Adani Enterprises.

The division serves as an incubator for Adani’s young ventures, such as airports, in which the group had no experience before buying six in 2019, or creating what it says will be “the world’s largest green hydrogen ecosystem.”

Adani Enterprises had a 10x net debt-to-ebitda ratio as of the fiscal year ending March 2022, according to calculations by Fitch’s CreditSights firm, one of the highest in the conglomerate. But it requires more spending to meet its targets, with plans to more than double annual capital spending to 400 billion rupees ($4.88 billion) both this year and next.

Yet no company better captures the scale of the group’s ambition than Adani Green Energy, which was founded in 2015 with the goal of becoming one of the world’s largest providers of renewable energy.

After initial losses, Adani Green broke even and made a profit of Rs 4,900 crore in fiscal 2022. But its net debt has quintupled on a stable capital basis, from Rs 108,000 crore in 2019 to 513 billion rupees last year, on net debt of 14.9 times ebitda, according to CreditSights.

To allay concerns about its debt, the Adani group has turned to global investors to try to inject capital into its companies, even with this week’s aborted share sale.

France’s TotalEnergies has invested since 2019 more than $7 billion in Adani’s gas, renewables and green hydrogen businesses, while the United Arab Emirates’ International Holding Company last year invested $2 billion in Adani Enterprises, Adani Green and Adani Transmission.

However, Adani will need more money than he can raise through equity alone if he is to finance his ambitious plans, leaving limited scope for deleveraging, according to CreditSights.

While Adani traditionally borrowed from state-owned banks and other lenders in India, CreditSights said it had increasingly turned to global banks and bondholders attracted by their rapid growth and reliable cash flows generated by its established infrastructure businesses. .

Adani Green raised $750 million in green bonds last year and in December announced a $200 million yen-denominated refinancing facility with MUFG Bank and Sumitomo Mitsui Banking Corporation acting as lead lenders.

Adani Enterprises also borrowed around $1 billion from international lenders, including Apollo, Barclays, and Standard Chartered, to expand its airport business.

Brokerage CLSA said the debt of Adani’s five largest companies had doubled to Rs 2.1 trillion since 2019. Adani Group CFO Jugeshinder Singh said on Monday that total debt across the conglomerate was of 30,000 million dollars.

But the debt buildup has drawn scrutiny from some analysts and investors who say the pace of growth has little parallel in India. Rival conglomerate Reliance Industries, for example, launched a deleveraging campaign in 2020 to eliminate all of its net debt of more than $20 billion by raising capital from global investors including Facebook, KKR and Mubadala.

“It’s a concern for shareholders when a conglomerate leverages itself in other areas where expertise doesn’t exist,” said Sharmila Gopinath, a senior adviser to the Asian Corporate Governance Association. “How long will it take to catch up with a business like that?”

Adani denies that he is over-leveraged, saying in a response to Hindenburg on Sunday that “the leverage ratios of the Adani Portfolio companies continue to be healthy and in line with industry benchmarks for the respective sectors.”

It also questions CreditSights’ calculations of its net debt to Ebitda ratio, which puts Adani Enterprises at 4.9 times and Adani Green at 10.3 times. It says group-level net leverage has halved since 2013, while the percentage of pledged shares held by Adani or his associates in the group’s listed companies has also fallen as prices rise. of actions.

Adani has a proven ability to scale startups and execute ambitious projects.

But Nitin Mangal, an independent analyst, estimates the group will need to raise around Rs 1 trillion in capital over the next two years to finance its capex plans and continue tapping the debt markets.

Adani told the Financial Times in December that he expected more investment from “many sovereigns”.

“They have a lot of ambitious growth plans going forward,” Mangal said. “They will not be able to survive on debt alone. They have to maintain more equity to keep things going.”

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